The Bank of England should not be deterred by the pound’s recent plunge and ought to press ahead with interest rate cuts later this year, an influential think tank said yesterday.

Ernst & Young Item Club economists said the Bank’s Monetary Policy Committee “frequently worried” that a fall in sterling was inflationary because it made imported goods more expensive.

But Item Club senior economic adviser Hetal Mehta said the MPC should put aside such concerns and give the economy a much-needed boost with a cut in November or December this year.

Sterling has fallen 7 per cent this year against the dollar, but Mehta said this would not prove inflationary due to other factors at work such as the falls in oil and commodity prices and the fact that wages have lagged behind the inflation rate.

Mehta felt wages would continue to lag, with people prepared to take smaller pay increases in the face of rising unemployment.

But she added the Bank should cut only when inflation had peaked, probably in October.

“The main worry the MPC should have about the fall in sterling is whether it will have a significant impact on growth,” said Mehta.